Dollar mixed after BoE cuts, ECB holds steady

Greenback gains on yen as stocks rise on White House mortgage rescue plan

By

LisaTwaronite

SAN FRANCISCO (MarketWatch) -- The dollar was mixed Thursday, rising against the yen as Wall Street welcomed a White House plan to support the beleaguered housing sector, but losing ground against the euro.

Elements of the plan unveiled Thursday include a five-year freeze on interest rates for certain subprime loans, many of which are expected to reset to higher rates in the months ahead. See full story.

"Some skepticism from the markets concerning the proposed assistance plan to U.S. sub-prime mortgage holders likely weighed on the greenback to an extent, while profit taking ahead of Friday's U.S. employment report was evident as well," wrote currency analysts at Action Economics.

U.S. stocks opened higher despite mostly negative U.S. economic data, and rallied to a strong finish after the details of the plan were announced. See Market Snapshot. That gave the dollar a lift against the yen, which typically falls in line with risk appetite as investors borrow the lower-yielding currency to invest in higher-yielding assets.

The dollar was buying 111.26 yen, up from 110.82 yen in late U.S. trading Wednesday.

The euro traded at $1.4628, up from $1.4615 late Wednesday.

The pound was at $2.0263, compared with $2.0267 late Wednesday, and up from a low of $2.0179 earlier Thursday.

Earlier Thursday, the Bank of England cut its key interest rate, a decision that was expected after weak U.K. data were released on Wednesday. The European Central Bank held rates steady, also as expected.

The BoE cut its benchmark by a quarter-point to 5.5% after economic data in the previous few days showed a sharp slowdown in consumer confidence and in services sector growth.

The cut was the first since August 2005 and followed five hikes since August 2006. See full story.

After plunging more than 1% Wednesday on expectations of the BoE's move, the pound "has put in a relief rally to a degree, with the BoE seen as taking a pre-emptive decision rather than waiting until they are 'behind the curve,'" wrote analysts at Action Economics.

The ECB, which sets interest rates for the 13 countries that use the euro as their currency, kept rates at 4% after an unexpected acceleration in inflation as well as slowing, but not disastrous, economic data. See full story.

"While the ECB sees downside risks to growth, they are looking for near-potential growth next year, so unless the outlook deteriorates and inflation subsides more than expected, it does not look as if the ECB has an appetite to cut rates," which should support the euro, wrote Benjamin Reitzes, economic analyst at BMO Capital Markets.

Rising jobless claims

The Labor Department said initial jobless claims reaching their highest level since late October 2005. See Economic Report.

And the rate of loans entering the foreclosure process during the third quarter at their highest levels since the Mortgage Bankers Association began compiling its quarterly delinquency survey in 1986. See full story.

The Federal Reserve reported in its flow of funds report Thursday that U.S. households lost a record $128 billion in real estate equity in the third quarter, as home prices fell and mortgage debts climbed. See Economic Report.

The data downbeat did little to change market consensus that the U.S. Federal Reserve will cut interest rates by 25, not 50, basis points next week. Lower interest rates pressure the dollar by reducing the return on dollar-denominated assets, so expectations of a less aggressive Fed move underpin the greenback.

On Tuesday, the Bank of Canada cut its targeted rate by a quarter point to 4.25%, citing worsening problems in the U.S. housing market. See full story.

The move sent the Canadian dollar, or loonie, up more than 1% against its U.S. rival. On Thursday, the dollar was trading at C$1.0081, down from C$1.0122 late Wednesday.

Some analysts pointed out that the easing in response to the spread of the U.S. credit crisis is not a coordinated move.

"Although the BOC cut already and the Fed is widely expected to next week, the BoE move does not signal a coordinated move," wrote Marc Chandler, currency strategist at Brown Brothers Harriman.

"Countries do not seem to be coordinating policy as much as reacting independently to developments in their own economies and the capital markets," he said.

A day after Canada's move, the Reserve Bank of Australia held its official cash rate unchanged at 6.75% but gave a more dovish outlook than it did in the preceding month, and said prospects for growth in the major economies appears to be weakening.

The Aussie dollar was trading at $0.8780 Thursday, up from $0.8706 late Wednesday.

Meanwhile, the South African rand gained against the dollar Thursday after the South African central bank hiked its key policy rate by 50 basis points to 11% to fight rising inflationary pressures in the local economy. See Emerging Markets Report.

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